BMI's Executive Summary

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New Business Environment Ratings

For 2008, BMI has made wholesale changes to the methodology behind its proprietary Business Environment Rankings for the tourism industry across Asia. Our new rating system is divided into distinct areas: limits of potential returns, which evaluates the size and growth potential of every state's tourism industry, and also broader factors that may inhibit its development over the coming years; and risks to potential returns, which evaluates industry risks and threats coming from the state's political and economic backdrop that may impede the realisation of anticipated returns from the sector over our forecast period.

These ratings have been developed to complement BMI's range of country risk ratings and now integrate all of the 16 industries covered by BMI under one methodology. In these new ratings, Thailand emerges as the best-placed country, scoring 68 points out of a possible 100. The country has recovered well from the tsunami of late 2004 and continues to prioritise the tourism industry as a key source of foreign currency earnings. The lowest-placed countries are Indonesia and Vietnam, which both score 56 points. Indonesia is penalised for the still-high risk of further bombings on the key tourism island of Bali, while Vietnam is still only in the very early stages of establishing a dedicated tourism policy. Indeed, it was only in September 2007 that the nation created its first ever ministry of tourism.

China ranks third in our new ratings. We believe the country will continue to see strong tourism revenue growth over our forecast period. However, the country scores relatively poorly on our long-term country risk variable, which could act as a constraint to the industry over the longer term.

2008 Tourist Arrivals To Boom

The long-awaited Olympic Games will begin in China on 8 August 2008 and last until 24 August. We anticipate Olympic-related arrivals to boost 2008 tourist arrivals as a whole by 10% year-on-year, after growth of 4-6% year-on-year for much of the previous decade. Although tourist arrivals in H1 2008 may dip somewhat, as tourists hold off booking trips in order to coincide with the games, we expect Q3 2008 to more than make up for this.

Moreover, the tourism boost is expected to affect more than just the Games sites. We expect tourists to take advantage of being in China for the Olympics to expand their itineraries to other parts of the country, with Tibet in particular an attractive destination. As such, we expect tourism arrivals to these regions to spike as well, distributing tourism revenues more equally across the country than might otherwise have been expected. Other regions likely to benefit significantly from the Games are the Special

Administrative Regions of Macao and Hong Kong, which are popular as gateways to mainland China. Hong Kong in particular is likely to attract a substantial amount of through traffic, owing to the numbers of cheap flights from Europe to Hong Kong, which then allow for connecting flights to mainland China.

Hotels Growth To Meet Demand

With the 2008 Olympic Games in Beijing now imminent, hotel chains have been assessing the availability of rooms. There had been concerns that there would be a lack of room availability in Beijing and Shanghai, owing to delays to construction. However, these problems appear to have been overcome, and supply of rooms now appears more than able to meet demand, particularly towards the high end of the market.

The number of star-rated hotels in China as a whole had reached 13,378 by 2006, close to a 400% increase since 1997. In Beijing, there were 652 star-rated hotels in 2005, with 109,700 rooms, and local estimates put the number of rooms at 151,000 by early 2008. This represents growth of nearly 40% in two years, primarily attributable to the pre-Olympics construction boom. For Shanghai, in 2006 there were 317 star-rated hotels with 67,700 rooms.

Indeed, there are now even slight concerns regarding a supply glut in these cities. This may not apply so much during the Olympics – when both international and internal tourist arrivals are anticipated to hit a decade-long high – but certainly room capacity may exceed demand in Q4 2008. As such, we expect the pace of room expansion to slow rapidly following the pre-Olympic boom, as the tourism industry enters a period of consolidation.

Links Grow With Costa Rica

The decision by the government of Costa Rica to switch diplomatic recognition from Taiwan to China in June 2007, breaking an alliance of nearly 60 years, will have positive consequences for Chinese tourism. Costa Rica is keen to establish tourism links with China in order to boost its own tourism sector. However, this will also facilitate the flow of Cost Rican tourists to China, especially given the proximity of the Olympic Games.

The Chinese and Costa Rican governments are currently in negotiations with airlines to open more routes between the two countries. These are expected to be accompanied by introductory offers emphasising the attractiveness of China as a holiday destination. Tie-ups between Costa Rican and Chinese tourist agencies are also underway, promoting Olympic-specific packages as well as more general tours around China.

Chapter 1 - New This Quarter

US Airline Investment

Airline Profitability

Core Forecasts

HK Consumer Demand Positive Driver

Hotels

Exchange Rate Trends Remain Mildly Negative

Bird Flu Remains on Radar Screens

Chapter 2 - Market Overview

Tourism Outlook

Table: China Historical Data And Forecasts – Tourism Industry (US$bn unless otherwise stated)

Table: China Historical Data And Forecasts – Travel Industry

Table: China Tourism Industry SWOT

Special Focus: The Olympics

Chapter 3 - Macroeconomic Scenario

HK Consumer Demand a Positive Driver

Table: China: Macroeconomic Data And Forecasts

Currency Exerts a Drag on Visitor Arrivals

Chapter 4 - H5N1 Virus (Update): Still A Key Issue

Tourism Business Environment

Tourism Business Environment Ranking

Table: Asia Travel & Tourism - Business Environment Ranking

Politics – Long-Term Risk

Overall Business Environment

International Tourism Receipts

Visitor Arrival Growth

Investment Environment

Shock Factor

Chapter 5 - Travel

State-run Airlines

Oil Price Threat: Receding?

Table: Oil Price Forecasts

Private Airlines

Chapter 6 - Hospitality

Hotels

Table: China Structure Of Accommodation Market

Key Risks To Accommodation Forecast Scenario

Gaming

Chapter 7 - Company Profiles

Air China

Melco International Development

Shangri-La Asia Ltd

Jinjiang International Holdings

Chapter 8 - BMI Forecast Modelling

How We Generate Our Industry Forecasts

Tourism Industry

Sources

Competitive Landscape for Asia Tourism Reports: Sample of Companies Ranked

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Comparative cross-border analysis assessing business and regulatory factors to rank Asia’s most competitive tourism markets. Indicators used include Political Risk, Business Environment Risk, Forecast International Tourism Receipts, Visitor Arrival Growth, Investment Environment and Shock Factors (taking account of any special factors such as terrorism, natural disasters and disease). Company SWOTs for leading resort, hotel, airline, travel and tourism operators in each market, including competitive intelligence on overall geographic presence, competitive positioning and relationships with international operators; % share of operator markets; % share of international arrivals and departures; % share of busiest domestic routes; main products and services; panregional expansion, merger and acquisition strategies.

Network of Asain Tourism Sources

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BMI's Asian Tourism Reports are based on an extensive network of multilateral organisations, government departments, tourism industry associations, chambers of commerce and company reports. Information sources include: